Following our initial comments relating to recent remuneration-related disclosures by listed companies (refer to our September 2012 Newsletter), we have undertaken further analysis into the disclosures made in the recently-completed reporting period.
We analysed a representative sample of two groups of companies within the ASX 100. The first group comprised companies that stated no remuneration recommendations were provided during the 2012 year. The second group comprised companies that revealed they had received remuneration recommendations during the period.
For the first group of companies, no remuneration recommendations were provided to the company. Whilst no remuneration consultant (as defined in the Corporations Act) was appointed, a remuneration adviser was engaged to provide advice not considered by the Board to constitute a remuneration recommendation.
Given the definition of a ‘remuneration recommendation’ as provided in the Act, we assume that any remuneration advice provided in this context did not relate to ‘how much’ or ‘what elements’ the remuneration of key management personnel of the company should receive.
We note the continuing voluntary disclosure of any remuneration advisers engaged and remuneration advice provided not constituting remuneration recommendations. With one notable exception, none of the companies in this group (voluntarily) disclosed the fees paid for such advice nor advice relating to non-remuneration related matters.
Given their significant and growing responsibilities and increasing shareholder demands and public scrutiny, we query whether Boards of the above companies are in a position to consistently implement and review appropriate and effective KMP-related remuneration arrangements (relating specifically to the quantum and structure of their remuneration) without seeking independent remuneration recommendations.
Remuneration recommendations were provided to all companies in the second group. Accompanying their disclosure were details relating to the aggregate fees paid by the company for such recommendations. Again, we assume these fees were paid for remuneration advice relating to ‘how much’ or ‘what elements’ the remuneration of key management personnel of the company should receive.
If companies have been provided with remuneration recommendations, they must also disclose fees paid to the remuneration consultant for other services. These services could relate to both remuneration advice not constituting remuneration recommendations (eg. general ‘benchmarking’ advice) and/or other advice (eg. tax, legal and accounting advice).
The range of fees paid for ‘other advice’ varied quite substantially, from less than $100,000 to several million dollars. In one case, the fees for other advice represented a multiple of over 200 times the fees paid for remuneration recommendations provided to the company. In this context, it must be queried whether the stated aims of the new remuneration provisions (preserving independence, avoiding conflicts of interest and undue influence) have been achieved. We note that, almost exclusively, the remuneration adviser disclosed for each of the companies in this group remained unchanged following the introduction of the new provisions. We query the extent and duration of the adviser’s involvement with the company before this time and the implications (if any) for the independence of any remuneration advice obtained.
Whilst the new requirement to disclose the provision of other services (and the quantum of fees paid for such services) has served to identify such instances, we question whether the disclosure sufficiently assists shareholders assess the independence of the advice provided by remuneration consultants to Boards and their remuneration committees.
As the Explanatory Memorandum accompanying the introduction of the new provisions noted (at paragraph 2.3):
“A key concern raised by stakeholders is that remuneration consultants may be placed in a position of conflict if they are asked to provide advice on the remuneration of officers who might have the capacity to affect whether or not that consultant’s services will be retained again (either for remuneration advice or other services the consultant may provide to the company). For example, a remuneration consultant may feel that remuneration advice that is unfavourable to the company executives may compromise their ability to obtain future work from the company.”
One meaningful disclosure (either voluntarily made or mandated by the introduction of new provisions) which could assist shareholders is notification of whether remuneration recommendations provided were in fact adopted by Boards and, if not, the justifications for not doing so.